Fund Review
The fund had a good rand return in the quarter of 5.9%, although this translates into a negative dollar return of 3.6%, when one takes account of the fall in the rand (9% against the dollar, 6.4% against the euro and 0.5% against the pound). For the year to end March the fund did 23.9% in rands and 2.9% in dollars, again helped materially by a 17% decline in the rand versus the dollar.

It was one of the tougher quarters for global bonds as bond yields rose in the US (from 2.95% to 3.1% for the US government 30 year bond) and other developed markets, as global economies showed signs of recovering; although yields did fall back again towards the end of March. Also the dollar firmed against most currencies, especially emerging market currencies. The portfolio, managed by Brandywine, continues to hold nothing in Japanese bonds (versus 18% for the benchmark) and very little in Europe (5.4% versus 25% for the benchmark), whilst remaining heavily overweight in the US (50% versus 36%). The portfolio is still very overweight in emerging market bonds (25.7% of the fund), including 3.6% in South African bonds. The biggest such holding is the 6.6% in Polish bonds (including the Polish zloty). The portfolio is holding just over 10% in cash too. The portfolio's modified duration (sensitivity to changes in bond yields) was cut from 4.8 at end January to 3.7 by end February, way below the benchmark's 5.99. Government or government agencies comprise 75% of the portfolio, with corporate bonds at just 8.5%. The yield to maturity is 2.66%.

Looking Ahead
Continuing big quantitative easing programs in the US, Japan and UK - buying of government bonds by the central banks - looks likely to keep bond yields reasonably in check, as will anchored short rates. So far there has been no sign of switching out of bonds into equities. The equity purchases have come out of cash. US ten year bond yields have recently dropped back from 2.1% to 1.75%.

So although STANLIB is recommending an underweight in global bonds, it looks like this asset class will retain favour as a diversifier in a portfolio, for example if "risk-off" strikes again, i.e. equities sell off, which frequently occurs in the May to September period.